17 May 2007

Take your foot off the gas

Here is a quick run down on the possible disaster we face this summer as we head into Memorial Day with the lowest beginning-of-driving-season stocks in US history. It would have been convenient had someone found out exactly what Minimum Operating Levels* really have become. I suspect we will answer this riddle this summer.

Minimum Operating Levels of petroleum inventories are when all cushions have been used up and the system is now starting to “rob Peter to pay Paul." At this stage, the risk of shortages starting to crop up is Red Alert. Sadly, the last serious study of where this invisible line of minimum stocks is was a NPC study done in 1988.

The reality of gasoline demand is that it will rise during July and August unless we have some roads blocked off to stem demand. Rising late-summer demand has happened almost every year, even as prices rose from $1/gallon to over $3!

To supply this market, several things have to work in unison.

Refineries need to crank up to over 16 million b/d instead of current 15 as they struggle to get into compliance from too little maintenance for too long.

Imports need to average well over 1 million b/d, and probably need to hit 1.5 million b/d, matching the all-time record set last year.

No hurricanes can hit the Gulf producing region.

Stock draws are the last plug in the dike. From the looks of things as we view Memorial Day weekend starting in just over a week, we fail on all four counts. The burning question is how much lower stocks can drop before shortages sweep our fragile gasoline supply system. Historically, it has been critically important that we build up gasoline stocks during the spring shoulder season (April-May) so that they can be liquidated during peak demand to prevent shortages. We seem to have run out the clock to fix the problem this summer.

I did some quick inventory numbers this morning [May 10]. At the end of February (which is the latest data we have on the location within five PAD districts) we had 116 million barrels of finished product and 99 million barrels of blending stocks (that are now far trickier to blend than when we had RFG) in inventory.

In the course of the next 10 weeks to May 4, we dropped 13.5 million barrels of finished stock and 10.3 million barrels of blending components.

But almost all of the drop probably came from Bulk Terminals as stocks at refineries are essentially works in process and stocks in pipelines and barges are steady flows.

If this is the case, bulk terminal drops were 30% for blending components and 27% for finished products.

The painful last 13 weeks ran out our USA gasoline clock. We must be right at the edge of genuine "minimum operating supplies" in at least a handful of states.

I am certainly glad I drive a diesel where the stock pool or inventory is tight but not nearly as tight as MOGAS [motor gasoline].

This could get really ugly real fast.

On that cheery note....

Matthew R. Simmons is founder and currently Chairman of Simmons & Company International, an independent investment bank specializing in the entire spectrum of the energy industry. Reprinted courtesy of ASPO USA